The Impact of Formal Financial Inclusion on Informal Financial Intermediation and Cash Preference: Evidence from Africa
32 Pages Posted: 10 Aug 2018
Date Written: July 26, 2018
This paper examines the effect of formal financial intermediation (inclusion) on informal financial intermediation and use of cash for economic activities. Using data from the Global Findex 2014, we examine whether the use of formal financial intermediaries reduces cash preference and the use of informal financial intermediaries. Our empirical results show that informal financial intermediation is positively associated with formal financial inclusion. This indicates that the relation between informal and formal financial intermediation is complementary rather than a trade-off, which demonstrate the importance informal finance play in the financial system of Africa. Moreover, the use of formal financial intermediaries significantly reduces the preference for holding cash, implying that robust financial system infrastructure has the potential of mobilizing excess liquidity in the informal economy of Africa for growth and development.
Keywords: financial intermediation, informal, formal, cash preference, ROSCAs, Tontines, savings clubs
JEL Classification: 012, G2, D2
Suggested Citation: Suggested Citation